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'lliis ib un underestimate because weare omitting [lit.1 cyst of advertisingand promotion, plus the fact thai only a fraction of alt pursued prospects end up belngconvcrtcd into customers. Now suppose the company estimates average customer liletimr value as follows:

a Annual customer revenue: 5500

■ Average number of loyal years: 30 n Company profit margin: .10

■ Customer lifctime value: SVOUO

This company is spending more to attract new customers than they are worth. Unless the company can sign up cus to tilers with fewer sales calls, spend less per sales call, stimulate halter new-customer annual spending, retain customers longer, or sell them higher-profit products, it is headed for bankruptcy, Of course, in addition to an average customer estimate. a company needs a way of estimating Cl,V for each individual customer to decide how much to invest in each customer.

C1,V calculations provide a formal quantitative framework for planning customer investment and help marketers to adopt a long-term perspective. Onei challenge in applying CIV concepis, however, is to arrive ai reliable cosl and revenue estimates. Marketers who use CLV concepts must also he careful to not forget die importance of short-term, brand-building marketing activities that will help to increase customer loyalty.

Customer Equity

The aim of customer relationship management (CUM) is to produce high customer equity. ¡Customer equity is the total of the discounted lifetime values ofa II of the firm's customers,'^ Clearly, the more loyal the customers, the higher (he customer equity. Elust, /eithainl, and Lennon distinguish ihree drivers of customer equily: value equily. brand equity, and relationship equity."1'1

■ Vhh'e egtdty is die customer's objective assessment of utility of an offering based on perceptions of its benefits relative to its costs, f he siib-drivers of value equity are qutility, price, and convenience, Each industry has to define the specific factors underlying each sub-driver in order to find programs to Improve value equity. An a i rl i tie passenger might define quality as seat width: a hotel guest might define quality as room sice. Value equity makes the biggest contribution to customer equity when products fire differentiated and when they are more complex and need to be evaluated. Value equily especially drives cub-lomer equity in business markets.

c Brand equify is the customer's subjective and intangible assessment of the brand, above iiiti beyond its objectively perceived value. The sub-drivers of brand equity are customer brand awareness, customer attitude toward the brand, and customer perception of brand el hies, tj) i n panics use advertising, public relations, and other communication tools to affect these sub-drivers, lirand equity is more Important than the other drivers of customer equity where products are less differentiated and have more emotional impact. We consider brand cqtiily in detail in Chapter

« Relationship equity is the customer's tendency to siick with the brand, above arid beyond objective a tid subjective assessments of its worth. Sub-drivers of relationship equity include loyalty programs, special recognition and treatment programs, co mm unity-build in g programs, and knowledge-building programs. Relationship equity is especially important where personal relationships count for a lot and where customers tend to continue wiib suppliers out of habit or iitenia.

This formulation integrates value management, brand iriantigpment, and p&t&ttPrisiiip> tBQnflgefiieni within a custnmer-ceuirted focus. Companies can decide which driverts) to strengthen for lile best payoff. The researchers believe they can measure and compare the financial return of alternative Investments to help choose strategies and actions based on which would provide the best return on marketing investments.

An alternative fori mil at i tin to customer equily is provided by Blaltbcigi Get/., and Thomas. They view customer equity as driven by three components: acquisition, retention, and addon selling.'-'Acquis i i ion is affected by i lie mini her ofprospects, the acquisition probability of a prospect, and acquisition spending per prospect, Retention is influenced by the retention rule and retention spending level, Add-on spending Is a function of the efficiency of add-on selling, flie number of add-on selling offers given to exist iug Custodiers, and the response rate in new offers. Marketing activities can then he judged by how they affect these three components.

Customer equity represents a promising approach to marketing management. "Marketing Insight; Progress and Priorities in Customer Equity Management" highlights some recent academic thinking on the subject. Note trio that customer equity notions can tie extended- Mohan Sawhney defines tin: relational equity of tin- firm as the cumulative value of the Jinn's network of relationships with its customers, partners, suppliers, employees, and Investore.^ Relational equity depends on the company's aliilily to attract and retain talent, customers, invesiOTS, and partners.

Ill Cultivating Customer Relationships

Maximizing cusiomer value means cultivating long-term customer relationships. In Ihc past producers customized their offerings to each customer:The tailor filled a suil and a cobbler made shoes breach individual. The Industrial Revolution ushered in an era of mass production. To majiimi]ic economies of scale, companies made standard gfiods in advatice of orders a ltd lei; ii lo individuals lo fit into whatever was available, producers moved from fiiif/i'/u-fliif/er marketing lo luiih-io-srvck marketing.

Companies are now moving «way from wasteful mass marketing to more precision marketing designed to htiild strong customer relationships.Today's economy is supported In in lorma lion businesses. Information has pie advantages of being easy to differentiate, customize, personaltae. and dispatch nver neiworks at incredible speed.

As companies have grown proficient at gathering information ahout individual customers and business partners (suppliers, distributors, retailers), and as their factories arc designed more flexibly, they have Increased iheir ability to Individualize market offerings, messages, and media. Mass customization is (he ability of a company Lhj meet r:it'll customer's requirements—lo prepare on a mass basis individually designed products, services, programs, and communications.1® While Levi's and Lands' End Were among the lirsi clothing manufacturers to introduce custom jeans, now there ¡ire many players in the mass-customization market:

3 Nike lets consumers customize athletic shoes for SIU more. A shopper with two different sine feci cap even net a nonmatching pair.

■ At Reflect-com, the Web site for Procter & Gamble spin-off HefLcct True Custom Hcatity, consumers answer a set Of questions and then gel custom -blended foundation, moisturizer, shampoo, or other cosmetics and skin-care products.

■ Interactive Custom Gnihes.w hi tit begun making mad e-to-ordcr jeans an tl pants in 1996, hasgrowtt so fust iliat It had to stop taking orders lo 2(103. The company is now trying to find ¿in apparel manufacturer or retailer partner to help ease the load.

Customer Relationship Management (CRM)

In addition m working with partners -called partner relationship management (PRH)-maiiv companies art; Intent oti developing stronger bonds with their customers -called cusiomer relationship management (CUM), j his is the process of managing detailed informal inn about individual customers and carefully managing all customer "touch points" to Maximize customer loyalty, A customer much point is any Occasion on which a customer encounters the brand and product—from actual experience to personal or mass coitttttinii-ca Linns to casual observation, l-t>r a hotel, the I ouch points I ne I ude reservations, check-in and choek-oiu, frequent-stay programs, room service, business services, exercise facilities, laundry service, restaurants, and bars, lor insianee, the Pour Seasons relies on personal I ouches, such as a staff that always addressee guest* by name, high-powered employees who understand the needs of sophisticated business travelers, and ai least one best-in-region facility, sirch us a premier restaurant or spa.

Customer relationship management enables companies to provide excellent real-time customer service through the effective use of individual account information, based on

CREA" NG CUSTOMER VALUE, SATISFACTJQN, AND LÛVA..I Y CHAPTÈR 5 153

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